Parallel Economy

A growing share of economic activity in Guyana took place outside of
the official economy in the 1980s. The rise of the socalled parallel
market was alarming for several reasons. In general terms, the parallel
economy, or black market, was harmful because it indicated that the
official economy was not providing enough goods and services, and that a
"norm of illegality" existed in Guyana. More specifically, the
illegal economy drained talent and initiative from the official economy,
deprived the government of tax revenues, and led to inefficient use of
resources. In addition, the parallel market was considered a major
source of inflation and currency instability.

The size of Guyana's parallel economy was difficult to estimate
because illegal traders and businessmen kept a low profile to avoid both
foreign currency regulations and taxation. The Financial Times
and the Economist both estimated in 1989 that the parallel
market carried out between US$50 million and US$100 million worth of
business annually. By the higher estimate, the parallel economy was
about one-third the size of the official economy. Economist Clive Thomas
argued in various studies that the parallel economy ranged from one-half
to roughly the same size as the official economy.

The key feature of the illegal economy was foreign currency trading,
an activity that arose when the government began restricting legal
access to foreign exchange. When it introduced foreign exchange controls
in the late 1970s, the government was trying to keep Guyana's balance of
payments from worsening by controlling the flow of money and goods to
and from the country. The government also had to restrict access
to foreign currency in order to maintain an overvalued exchange rate. If
Guyanese citizens had had unlimited access to foreign currency, many of
them would have bought United States dollars, depleting Guyana's foreign
exchange reserves, because of their anticipation of devaluations of the
Guyanese dollar.

The restriction on foreign exchange helped maintain the fixed
exchange rate but it also created a shortage of foreign currency, making
it nearly impossible for individuals and businesses to import essential
items (foreign merchants would not accept Guyanese dollars). Street
traders filled the gap by supplying much-needed foreign currency; they
made a profit by selling foreign currencies at a high price. Thus, the
black market exchange rate per United States dollar was about G$60 in
early 1989, compared with the official rate of G$33. The Economist
reported in mid-1990 that brick-sized stacks of G$100 bills were trading
for US$1,000 on Georgetown's America Street, dubbed "Wall
Street."

The largest currency traders in the country, known as the Big Six,
set the parallel exchange rate on a weekly or daily basis by tracking
supply and demand, according to Thomas. There were several sources of
the foreign currency supply: illegal exports of gold, diamonds, rice,
sugar, shrimp, and furniture; cash remittances from abroad; unrecorded
expenditures by tourists and visitors; overinvoicing of imports; and
sales of illegal drugs. Demand for foreign currency came primarily from
three groups: local producers or retailers needing to import foreign
materials or merchandise, investors and savers seeking a safe haven
against devaluation of the local currency, and people exchanging local
currency because they planned to leave Guyana temporarily or
permanently. There was a close relationship between foreign currency
trading and other illegal activities such as smuggling, tax evasion, and
narcotics sales.

The government responded ambivalently to the parallel market.
Official policy restricted illegal economic activity, but in practice,
the government often turned a blind eye to the welldeveloped parallel
economy. Government attempts to repress the illegal market, as in the
early 1980s, were unsuccessful. Guyana's borders were long and
unpatrolled, making smuggling relatively easy. In addition, cash
remittances from abroad were common, meaning that many people in Guyana
had frequent access to foreign currency and could easily trade on the
parallel market. Many observers also noted that the government tolerated
the parallel market because it provided goods that were restricted but
essential. In fact, even state-owned companies traded on the parallel
market.

A fundamental shift in policy toward the parallel economy occurred in
the late 1980s, when the Hoyte government began stressing the need for a
revitalized private sector. To many people in Guyana, as well as in the
international financial community, the existing parallel market was the
epitome of private sector initiative under difficult conditions. The
Hoyte government signaled a measure of agreement with this view in 1989
when it legalized and regulated the parallel foreign currency market.
The government's aim was to eliminate the illegal economy by absorbing
it into the legal economy.